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US Dollar Index Analysis
Friday’s non-farm payroll data also included employment data, which is up 4.6% y/y, but still 1.4% lower than the start of the COVID-19 pandemic. Average hourly earnings growth was up 5.7% y/y and non-supervisory workers’ wages up by 6.9%.
The data points to a US economy that is growing very fast, and that the labour market is very strong. Unless you look at the Atlanta Fed GDPNow model which shows GDP falling towards zero. Thursday’s CPI data is the week’s focus and headline inflation above 7% will be all over FinTwit and the MSM. I am now expecting the Fed and government to come up with a positive spin on this, but most voters will be shocked at how fast inflation is rising and worried about the impact on how far their wages stretch in the coming months. We’re beyond the base effects of the lockdowns, so this is all about the continued supply chain disruptions and fallout from the stimulus cheques.
Rapidly rising inflation as seen in the core CPI, which removes the volatility of energy and food from the inflation reading will lead to a decline in the Manufacturing industry. So if this week’s CPI number is again higher, what we don’t want is for the next US ISM Manufacturing PMI to come in towards 50 or below. If that happens, we need to buckle in for a rough ride.
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$94.60 on the US dollar index is a significant low and the euro will play a big part in whether the US dollar index rises or falls ahead of the US CPI. The DXY doesn’t necessarily have a tight correlation to the US CPI or core CPI data but, higher inflation will add weight to the calls for the Fed to do a 50bps rate hike in March. Which in itself is bullish for the yields and detrimental to the bonds and will encourage foreign investors to park their money in a higher yielding US dollar, so effectively bidding it higher.
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On an H4 chart I have added an Andrews Pitchfork which highlights the possible upper and lower bands of a descending channel. I have added this as we need to consider that there is a possibility the greenback has been overbought and is declining as inflation is also detrimental to the currency in the longer term. Money becomes worth-less as inflation erodes purchasing power. But as inflation is currently affecting every currency in some way more rapidly than in previous months maybe the US dollar is a better bet than the others.
Should the DXY get above the $97.50 and previous swing high I will be targeting the $98 price level and beyond as there is little market structure that will act as resistance.
